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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________ to _________.
Commission File Number 0-26944
--------------------------
SILICON STORAGE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
California 77-0225590
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
1171 Sonora Court, Sunnyvale, CA 94086
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (408) 735-9110
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of class Name of each exchange on which registered
None. None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
--------------------------
Indicate by check mark whether SST (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that SST was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No _.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of SST's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No _.
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Aggregate market value of the voting stock held by non-affiliates of
SST as of February 28, 2001: $779,303,790 based on the closing price of SST's
Common Stock as reported on the Nasdaq National Market. Number of shares
outstanding of SST's Common Stock, no par value, as of the latest practicable
date, February 28, 2001: 90,747,876.
Documents incorporated by reference: Exhibits previously filed as noted
on page 34. Part III - A portion of the Registrant's definitive proxy statement
for the Registrant's Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission.
2
SILICON STORAGE TECHNOLOGY, INC.
Form 10-K
For the Year Ended December 31, 2000
TABLE OF CONTENTS
Part I Page
Item 1. Business ........................................................................ 4
Item 2. Properties ..................................................................... 13
Item 3. Legal Proceedings ............................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ............................. 14
Part II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters ............ 15
Item 6. Selected Consolidated Financial Data ............................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................. 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...................... 31
Item 8. Consolidated Financial Statements and Supplementary Data ........................ 32
Item 9. Changes in and Disagreements with Accountants on accounting and Financial
Disclosure .................................................................. 33
Part III
Item 10. Directors and Executive Officers of the Registrant .............................. 33
Item 11. Executive Compensation .......................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management .................. 33
Item 13. Certain Relationships and Related Transactions .................................. 33
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K ................. 34
Index to Exhibits ..................................................................................... 34
Signatures ............................................................................................ 36
Index to Consolidated Financial Statements ............................................................ 40
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PART I
Item 1. Business
Overview
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communications and Internet computing
markets.
We offer over 70 products based on our SuperFlash design and
manufacturing process technology. Our customers include: 3Com, Acer, Apple,
Asustek, Cisco, Compaq, FIC, Gigabyte, Hwawei, Hyundai, Infineon, Intel, IBM,
Inventec, Legend, LG, Lucent, Motorola, National Semiconductor, Nintendo,
Nortel, Panasonic, Quanta, Samsung, Sanyo, Siemens, Sony and VTech. We also
license our SuperFlash technology to leading semiconductor companies including
Analog Devices, ATMI, IBM, Motorola, National Semiconductor, Oki, Samsung,
Sanyo, Seiko-Epson, TSMC, and Winbond to embed in semiconductor devices that
integrate flash memory with other functions on a single chip. Our products are
manufactured at leading wafer foundries and semiconductor manufacturers
including Samsung Electronics, Sanyo, Seiko-Epson, TSMC and UMC. We also work
with IBM, Oki, National Semiconductor, Samsung Electronics, Sanyo, Seiko-Epson,
TSMC and Vanguard to develop new technology for manufacturing our products.
The semiconductor industry has historically been cyclical,
characterized by wide fluctuations in product supply and demand. From time to
time, the industry has also experienced significant downturns, often in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. Downturns of this type occurred in 1996, 1997 and
1998. These downturns have been characterized by weakening product demand,
production over-capacity and accelerated decline of selling prices, and in some
cases have lasted for more than a year. We recently began to experience a sharp
downturn in several of our markets late in the fourth quarter of 2000, as our
customers reacted to weakening demand for their products. To date, market
conditions have not improved during early 2001 and our customers have continued
to return product, cancel backlog and/or push out shipments. Our business could
be harmed by industry-wide fluctuations in the future.
We derived 77.6% of our product revenues during 2000 and 80.8% of our
product revenues during 1999 from product shipments to Asia. Additionally, all
of our major wafer suppliers and packaging and testing subcontractors are
located in Asia. During 1998 and 1997, several Asian countries where we do
business, including Japan, Taiwan and Korea, experienced severe currency
fluctuation and economic deflation, which negatively impacted our revenues and,
therefore, our ability to collect payments from these customers. In September
1999, Taiwan experienced a major earthquake. The resulting disruption to the
manufacturing operations in the wafer foundries and assembly and testing
subcontractors that we use in Taiwan harmed our revenues and operating results
during the third and fourth quarters of 1999.
Our product sales are made primarily using short-term cancelable
purchase orders. The quantities actually purchased by the customer, as well as
shipment schedules, are frequently revised to reflect changes in the customer's
needs and in our supply of product. Accordingly, our backlog of open purchase
orders at any given time is not a meaningful indicator of future sales. Changes
in the amount of our backlog do not necessarily reflect a corresponding change
in the level of actual or potential sales.
Sales to direct customers and foreign stocking representatives are
recognized upon shipment, net of an allowance for estimated returns. Sales to
distributors are made primarily under arrangements allowing price protection and
the right of stock rotation on merchandise unsold to customers. Because of the
uncertainty associated with pricing concessions and future returns, we defer
recognition of such revenues, related costs of revenues and related gross margin
until we are notified by the distributor that the merchandise is sold by the
distributor.
Most of our technology licenses provide for the payment of up-front
license fees and continuing royalties based on product sales. For license and
other arrangements for technology that we are continuing to enhance and refine
and under which we are obligated to provide unspecified enhancements, revenue is
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recognized over the lesser of the estimated period we have historically enhanced
and developed refinements to the technology, generally three years, the upgrade
period, or the remaining portion of the upgrade period from the date of
delivery, provided all specified technology and documentation has been
delivered, the fee is fixed or determinable and collection of the fee is
probable. From time to time, we reexamine the estimated upgrade period relating
to licensed technology to determine if a change in the estimated update period
is needed. Revenues from license or other technology arrangements where we are
not continuing to enhance and refine the technology or are not obligated to
provide unspecified enhancements is recognized upon delivery, if the fee is
fixed or determinable and collection of the fee is probable.
We recognize royalties received under these arrangements during the
upgrade period as revenue based on the ratio of the elapsed portion of the
upgrade period to the estimated upgrade period. We recognize the remaining
portion of the royalties ratably over the remaining portion of the upgrade
period. We recognize royalties received after the upgrade period has elapsed
when reported to us, which generally coincides with the receipt of payment.
Industry Background
Semiconductor integrated circuits are critical components used in an
increasingly wide variety of applications, such as computers and computer
systems, communications equipment, consumer products and industrial automation
and control systems. As integrated circuit performance has increased and size
and cost have decreased, the use of semiconductors in these applications has
grown significantly. According to a November 2000 Dataquest report, worldwide
semiconductor device revenue grew from $169 billion in 1999 to $232 billion in
2000 and will grow to $339 billion in 2004.
Historically, the demand for semiconductors has been driven by the
personal computer, or PC, market. The demand for PCs has grown in recent years,
in part due to increased use of PCs for Internet access. According to Dataquest,
the PC market grew from 100 million units shipped in 1998 to 118 million units
shipped in 1999 to 135 million units shipped in 2000. In recent years, growth in
demand for semiconductors relating to PCs has been outpaced by growth in demand
for semiconductors in digital electronic devices for communication and consumer
applications. Communications applications include digital subscriber line
modems, cable modems, wireless local area network devices, cellular phones and
pagers. Consumer-oriented digital electronic devices include digital cameras,
DVD players, MP3 players, personal digital assistants, set-top boxes, CD-ROM
drives and GPS navigation systems.
In order to function correctly, PCs and other digital electronic
devices require program code. The program code defines how devices function and
affects how they are configured. In PCs, this program code, or BIOS, initiates
the loading of the PC's operating system, which is then read from the disk
drive. In the case of other digital electronic devices, the program code is
stored in its entirety in nonvolatile memory, mostly in flash memory. As a
result, virtually all complex electronic systems that use a processor or
controller for computing, consumer, communications, and industrial applications
require nonvolatile memory.
System manufacturers generally prefer nonvolatile memory devices that
can be reprogrammed efficiently in the system in order to achieve several
important advantages. With reprogrammable memory, manufacturers can cost
effectively change program codes in response to faster product cycles and
changing market specifications. This in turn greatly simplifies inventory
management and manufacturing processes. Reprogrammable memory also allows the
manufacturer to reconfigure or update a system either locally or through a
network connection. In addition, in-system reprogrammable devices can be used
for data storage functions, such as storage of phone numbers for speed dialing
in a cellular phone.
Flash memory is the predominant reprogrammable nonvolatile memory
device used to store program code. Flash memory can electrically erase select
blocks of data on the chip much faster and more simply than with alternative
solutions, such as Erasable Programmable Read-Only Memory, or EPROM. Moreover,
flash memory is significantly less expensive than other reprogrammable
solutions, such as Electrically Erasable Programmable Read-Only Memory, or
EEPROMs. As a result, the demand for flash memory has grown dramatically. This
growth has been fueled by the need for code sharing and other
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storage functions in a wide array of digital devices. According to a November
2000 Semiconductor Industry Association report, worldwide flash memory revenue
was $10 billion in 2000 and will grow to $23 billion in 2003.
Our Solution
We are a leading supplier of flash memory semiconductor devices
addressing the needs of high volume electronic applications. We believe our
proprietary flash memory technology, SuperFlash, offers superior performance to
other flash memory solutions. In addition, we believe SuperFlash's benefits
include high reliability, fast write performance, ability to be scaled to a
smaller size and a low-cost manufacturing process. Many leading technology
companies use our technology in their products including 3Com, Acer, Apple,
Cisco, Compaq, Dell, FIC, Hyundai, Intel, IBM, LG, Lucent, Motorola,
Panasonic, Samsung, Sanyo, Siemens and Sony. New customers include Cisco and
Nortel.
We offer over 70 products based on our proprietary SuperFlash design
and manufacturing process technology. These products are produced to meet the
needs of a wide range of digital consumer, networking, wireless communications
and Internet computing markets. Our product offerings include standard flash
products, application specific memory products, embedded controllers and mass
storage products. Our memory devices have densities ranging from 256 Kbit to 16
Mbit and are generally used for the storage of program code. Our flash embedded
microcontrollers support concurrent flash read-while-write operations using
In-Application Programming, or IAP. Our mass storage products are used for
storing images, music and other data in devices such as digital cameras and MP3
players.
Our products are manufactured at leading wafer foundries and
semiconductor manufacturers including Samsung Electronics, Sanyo, Seiko-Epson,
TSMC and UMC. We also work with IBM, Samsung Electronics, Sanyo, Seiko-Epson and
TSMC to develop new technology for manufacturing our products. We license our
SuperFlash technology to leading semiconductor companies including Analog
Devices, ATMI, IBM, ISD, Motorola, Oki, Samsung, Sanyo, Seiko-Epson and TSMC to
embed in semiconductor devices that integrate flash memory with other functions
on a single chip.
Our Strategy
Our objective is to be the leading worldwide supplier of flash memory
devices and intellectual property for program code storage applications. In
addition, we intend to leverage our SuperFlash technology to penetrate the high
density mass storage markets. We intend to achieve our objectives by:
Maintaining a leading position in the program code storage market. We
believe that program code storage is an attractive segment of the flash memory
market for a number of reasons. While experiencing continued growth in all
densities, solutions for program code storage applications benefit from the
increasing number and variety of digital electronic applications, longer product
lives and lower density requirements relative to mass data storage applications.
We believe that our proprietary SuperFlash technology is a superior product for
program code storage applications because it offers reliability and high
performance at a low cost.
Continuing to enhance our leading flash memory technology. We believe
that our proprietary SuperFlash technology is less complicated, more reliable,
more scalable and more cost-effective than competing flash memory technologies.
Our ongoing research and development efforts are focused on enhancing our
leading flash memory technology. We are working with IBM, National
Semiconductor, Samsung, Sanyo, Seiko Epson, TSMC, and Vanguard to develop new
process technologies for SuperFlash.
Introducing new products based on SuperFlash. We intend to introduce
new and different application specific products. We are currently developing
ComboMemory, a new class of devices for wireless and portable applications that
combine volatile and nonvolatile memory on a single monolithic silicon chip or
multiple dies in a common package with optimized performance. We are also
developing a new reprogrammable microcontroller family and new mass storage
products. In addition, we plan to introduce a new family of serial flash
products, 8 Mbit firmware hubs and 8, 16, 32 and 64 Mbit concurrent
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flash. ComboMemory and concurrent flash are designed to address the memory needs
of wireless communications devices, such as cellular phones, wireless modems and
pagers.
Maintaining a leading position in licensing embedded flash technology.
We believe that SuperFlash technology is well-suited for embedded memory
applications, which integrate flash memory and other functions onto a monolithic
chip. We intend to continue to license SuperFlash technology to semiconductor
manufacturers for use in embedded flash applications and to enhance our
technology to facilitate integration at higher densities and higher levels of
complexity.
Penetrating the high density mass storage market. Many digital
electronic devices currently being introduced, such as MP3 players, digital
cameras and PDAs, require high density flash memory for storing music, pictures
and other data that require mass storage capacities. We believe that the market
for high density flash memory is attractive based on its potential growth. We
further believe that SuperFlash technology can readily scale to address this
market growth. We intend to leverage our leading technology and strong
manufacturing partnerships to introduce high density mass storage flash products
and to compete effectively in this market.
Our Flash Products
Standard Flash Memory Products. Currently, we offer low and medium
density devices that target a broad range of existing and emerging applications
in the digital consumer, networking, wireless communications and Internet
computing markets. Our products are differentiated based upon attributes such as
density, voltage, access speed, package and predicted endurance.
We have three Standard Flash Memory product families: the Small-Sector
Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products.
Among the three product families, SSF provides the highest
functionality. MPF is a lower cost flash solution because it eliminates much of
the peripheral circuitry of SSF products while retaining many of the benefits of
the SuperFlash core--high reliability, faster write performance, geometric
scalability and a low-cost manufacturing process. Both SSF and MPF address
mainstream flash applications that require In System Programming, or ISP. MTP
devices are our lowest cost flash products. Our MTP products provide an
electrically-erasable alternative to EPROM and other low-end flash products that
do not require ISP.
Application-Specific Memory Products. Our application-specific memory
products consist of ComboMemory, FlashBank, Serial Flash and Firmware Hub, or
FWH. These products are designed to address specific applications such as
cellular phones, pagers, PDAs, set-top boxes, hard disk drives and PC BIOS
applications.
Flash Embedded Controllers. Our flash embedded controllers include the
FlashFlex51 microcontroller product family, which features products that are
both software and pin compatible with industry standard 8051 microcontroller
products. This family is designed with two banks of program memory to support
concurrent read and write operations using IAP. It also contains SoftLock
security features allowing IAP while preventing software piracy. These products
target the 8-bit microcontroller market segment with products addressing the
emerging applications for in-system reprogrammable microcontrollers.
Mass Storage Products. Our mass storage products, including the ADC,
ADM, and CompactFlash Card product families address digital cameras, digital
cellular phones, Internet appliances, PDAs, MP3 players, Set-top boxes, and
other types of mass data storage applications. Our mass storage products
leverage our patented ATA controller technology and flash memory design
expertise to offer favorable read/write data transfer rates to the flash memory,
which allows significant speed advantages for applications such as digital
cameras.
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Technology Licensing
We license our SuperFlash technology to semiconductor manufacturers for
use in embedded flash applications. We intend to increase our market share by
entering into additional license agreements for our process and SuperFlash
memory cell technology with leading wafer foundries and semiconductor
manufacturers. We expect to continue to receive licensing fees and royalties
from these agreements. We design our products using patented memory cell
technology and fabricate them using patented process technology. We own 32
patents in the United States relating to certain aspects of our products and
processes, and have filed for several more. In addition, we hold several patents
in Europe and Canada and have filed several foreign patent applications in
Europe, Japan, Korea, Taiwan and Canada.
Customers
We provide high-performance flash memory solutions to customers in four major
markets: digital consumer, networking, wireless communications and Internet
computing. Our customers benefit by obtaining products that we believe are
highly reliable, technologically advanced and that have an attractive cost
structure. As a result of these highly desirable benefits, we have developed
relationships with many of the industry's leading companies. In digital consumer
products, we provide memory components for consumer companies including Canon,
Datel, Freetron, GSL, Inventec, Nintendo, Panasonic, Sanyo, Siemens, Sony, TiVo,
Vtech and Xerox. In networking, we provide memory components for 3Com, E-tech,
Intel and Nortel. In wireless communications, we provide products for companies
including Kirks, Lucent, Maxon, Quanta, RTX, Siemens and VTech. In Internet
computing, we provide wide array of memory components for companies including
Acer, Apple, Asustek, Compaq, Dell, FIC, Gigabyte, Mitac, NEC and Quanta.
The following tables illustrate the geographic regions in which our customers or
licensees operate based on the country to which the product is shipped or
license revenue is generated.
Year ended December 31,
------------------------------------------
1998 1999 2000
----------- --------------- -------------
United States $ 5,099 $ 13,644 $ 76,898
Europe 6,929 7,347 28,376
Japan 13,739 16,396 66,635
Korea 3,756 11,750 42,986
Taiwan 19,134 33,541 133,677
China (including Hong Kong) 14,104 28,776 90,839
Other Asian countries 6,119 9,340 48,102
Rest of world 531 4,000 2,748
----------- --------------- -------------
$ 69,411 $ 124,794 $ 490,261
=========== =============== =============
Sales and Distribution
We sell a majority of our products to customers in Asia through manufacturers'
representatives. We also sell and distribute our products in North America and
Europe through manufacturers' representatives and distributors. Our manufacturer
representative and distributor relationships are generally cancelable by us or
the other parties with reasonable notice.
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Applications
As the Internet, communications and consumer electronics industries
continue to expand and diversify, new applications are likely to be developed.
We believe our products are designed to address this expanding set of
applications:
Digital Consumer Networking Wireless Communications Internet Computing
- ---------------------------------------- -------------------------- --------------------------------------------------
TV Replayer Set-top Box DSL Modem Cellular Phone Network PC
Digital TV CD-ROM Drive Cable Modem Data Pager Notebook PC
Digital Camera CD-RW Drive V.90/56K Modem Cordless Telephone Palm PC
DVD Player DVD-ROM Drive Wireless LAN Cellular Phone GPS X-PC
VCD Player DVD-RAM Drive Network Interface Card Bluetooth Applications Server
MP3 Player DCD-RW Drive Router PC Firmware Hub
Video Game Web Browser VoIP Graphics Card
PDA Hand Held GPS Printer
Electronic Book Digital Camcorder Copier/Scanner
Memory Cards Electronic Toys Bar Code Scanner
Manufacturing
We purchase wafers and sorted die from semiconductor manufacturing
foundries, have this product shipped directly to subcontractors for packaging,
testing, and finishing, and then ship the final product to our customers.
Virtually all of our subcontractors are located in Asia.
Wafer and Sorted Die. We have manufacturing arrangements with National
Semiconductor, Samsung, Sanyo, Seiko-Epson, TSMC, UMC, and Vanguard. During
2000, our major wafer fabrication foundries were TSMC, Sanyo, Samsung and
Seiko-Epson. In 2000, wafer sort, which is the process of taking silicon wafers
and separating them into individual die, was performed at Acer Testing Inc.,
KYE, Lingsen, Samsung, Sanyo, Seiko-Epson and TSMC. Although capacity is not
guaranteed, under these arrangements we generally receive preferential treatment
regarding wafer pricing and capacity. In order to obtain, on an ongoing basis,
an adequate supply of wafers, we have considered and will continue to consider
various possible options, including equity investments in foundries in exchange
for guaranteed production volumes, the formation of joint ventures to own and
operate foundries and the licensing of our proprietary technology. On March 6,
2001, we invested $50.0 million in Shanghai Grace Semiconductor Manufacturing
Corporation, or GSMC. GMSC is a foreign-funded wafer foundry project which will
be located in Shanghai, People's Republic of China.
Packaging, Testing and Finishing. In the assembly process, the
individual die are assembled into packages. Following assembly, the packaged
devices require testing and finishing to segregate conforming from nonconforming
devices and to identify devices by performance levels. Currently, all devices
are tested and inspected pursuant to our quality assurance program at our test
facilities in Sunnyvale, California or at other domestic or international
subcontracted facilities. Finishing operations are performed at our Sunnyvale
facility or at other domestic or international subcontracted facilities before
shipment to customers. Certain facilities currently perform consolidated
assembly, packaging, test and finishing operations at one location. During 2000,
most subcontracted facilities performing the substantial majority of our
operations were in Taiwan. The subcontractors with the largest amount of our
activity are KYE, Lingsen, and PTI. We hold equity investments in three
subcontractors: KYE, PTI, and Apacer. For newly released products, the initial
test and finishing activities are performed at our Sunnyvale facility.
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Research and Development
We believe that our future success will depend in part on the
development of next generation technologies with reduced feature size. During
1998, 1999 and 2000, we spent $14.5 million, $18.2 million, and $41.5 million,
respectively, on research and development. Our research efforts are focused on
process development and product development. Our research strategy is to
collaborate with our partners to advance our technologies. We work
simultaneously with several partners on the development of multiple generations
of technologies. In addition, we allocate our resources and personnel into
category-specific teams to focus on new product development. From time to time
we invest in, jointly develop with or license or acquire technology from other
companies in the course of developing products. For example, in December 2000,
we acquired Agate Semiconductor, Inc., a privately held, memory design company
located in Santa Clara, California.
Competition
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. We compete with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than us. Our low to
medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Advanced
Micro Devices, Inc., Atmel Corporation, STMicroelectronics, Inc., Winbond
Electronics Corporation, and Macronix, Inc. Our high density memory products
compete with products offered by Intel, Advanced Micro Devices, Atmel, Fujitsu
Limited, Sharp Electronics Corporation, Samsung, Mitsubishi Corporation and
Toshiba Corporation. In addition, competition may come from alternative
technologies such as ferroelectric random access memory device, or FRAM,
technology.
The competition in the existing markets for our new products such as
the FlashFlex51 microcontroller product family and the ADC, ADM, and
CompactFlash Card product families is extremely intense. We compete principally
with major companies such as Philips Electronics, Atmel, Intel, and Microchip
Technology Inc. in the microcontroller market and with SanDisk Corporation,
M-Systems and Hitachi Corporation in the memory card and memory module market.
We may, in the future, also experience direct competition from our foundry
partners. We have licensed to each foundry the right to fabricate certain
products based on our proprietary technology and circuit design, and to sell
such products worldwide, subject to royalty payments back to us.
We compete principally on price, reliability, functionality and the
ability to offer timely delivery to customers. During the extreme currency
devaluations in Asia in 1997-1998, we were severely impaired in our ability to
compete on the basis of price. While we believe that our medium density products
currently compete favorably on the basis of reliability and functionality, it is
important to note that our principal competitors have a significant advantage
over us in terms of greater financial, technical and marketing resources. Our
long-term ability to compete successfully in the evolving flash memory market
will depend on factors both within and beyond our control, including access to
advanced process technologies at competitive prices, successful and timely
product development, wafer supply, product pricing, actions of our competitors
and general economic conditions.
Employees
As of December 31, 2000, we employed 455 individuals on a full-time
basis, all but twenty-six of whom reside in the United States. Fourteen
employees reside in Taiwan, four employees reside in Japan, three employees
reside in the United Kingdom, two employees reside in China, and one employee
resides in each of Sweden, Hong Kong, and Korea. Of these 455 employees, 94 were
employed in manufacturing support, 221 in engineering, 88 in sales and marketing
and 52 in administration and finance. No employees are represented by a
collective bargaining agreement, nor have we ever experienced any work stoppage
related to strike activity. We believe that our relationship with our employees
is good.
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Executive Officers and Directors
The following table lists the names, ages and positions of our executive
officers and directors as of December 31, 2000. There are no family
relationships between any director or executive officer of SST. Executive
officers serve at the discretion of the board of directors.
Name Age Position
- ---- --- --------
Bing Yeh (1)(4) 50 President and Chief Executive Officer and Director
Yaw Wen Hu 51 Senior Vice President, Operations and Process
Development and Director
Derek Best 50 Senior Vice President, Sales and Marketing
Michael Briner 53 Senior Vice President, Application Specific Product Group
Isao Nojima 56 Vice President, Standard Memory Product Group
Paul Lui 50 Vice President, Special Product Group
Jeffrey L. Garon 40 Vice President, Finance and Administration and
Chief Financial Officer and Secretary
Tsuyoshi Taira (1)(2)(3) 62 Director
Yasushi Chikagami (1)(2)(3) 62 Director
Ronald Chwang (1)(2)(3) 52 Director
- ---------------------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee
Bing Yeh, one of our co-founders, has served as our President and Chief
Executive Officer and has been a member of our board of directors since our
inception in 1989. Prior to that, Mr. Yeh served as a senior research and
development manager of Xicor, Inc., a nonvolatile memory semiconductor company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell
Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM
technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and
earned an Engineer degree at Stanford University. Mr. Yeh holds an M.S. and a
B.S. in Physics from National Taiwan University. Mr. Yeh is also the Chairman of
the Monte Jade Science & Technology Association for 2001.
Yaw Wen Hu, Ph.D., joined us in 1993 as Vice President, Technology
Development. In 1997, he was given the additional responsibility of wafer
manufacturing and, in August 1999, he became Vice President, Operations and
Process Development. In January 2000, he was promoted to Senior Vice President,
Operations and Process Development. Dr. Hu has been a member of our board of
directors since September 1995. From 1990 to 1993, Dr. Hu served as deputy
general manager of technology development of Vitelic Taiwan Corporation. From
1988 to 1990, he served as FAB engineering manager of Integrated Device
Technology, Inc. From 1985 to 1988, he was the director of technology
development at Vitelec Corporation. From 1978 to 1985, he worked as a senior
development engineer in Intel Corporation's Technology Development Group. Dr. Hu
holds a B.S. in Physics from National Taiwan University and an M.S. in Computer
Engineering and a Ph.D. in Applied Physics from Stanford University.
Derek Best joined us in June 1997 as Vice President of Sales and
Marketing. In 2000 he was promoted to Senior Vice President, Sales & Marketing.
Prior to joining SST he worked for Micromodule Systems, a manufacturer of high
density interconnect technology, as Vice President Marketing and Sales World
Wide from 1992 to 1996. From 1987 to 1992 he owned his own company, Mosaic
Semiconductor, a semiconductor company. Mr. Best holds an Electrical Engineering
degree from Portsmouth University in England.
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Michael Briner joined us as Vice President, Design Engineering in
November 1997,and become Vice President, Products during 1999. In February 2001,
he was promoted to Senior Vice President, Application Specific Product Group.
From 1993 to 1997, he served as Vice President of Design Engineering for Micron
Quantum Devices, Inc., a subsidiary of Micron Technology, Inc., chartered to
develop and manufacture flash memory products. From 1986 through 1992, he served
as Director of Design Engineering for the Nonvolatile Division of Advanced Micro
Devices, Inc. In this position, he was instrumental in helping AMD become a
major nonvolatile memory manufacturer. Mr. Briner holds a B.S. in Electrical
Engineering from the University of Cincinnati.
Isao Nojima served as our Vice President, Advanced Development since
July 1997 until he was named Vice President, Standard Memory Product Group in
2000. From March 1993 to June 1997 he served as Vice President, Memory Design
and Product Engineering. From 1990 to 1993, Mr. Nojima served as Director of
Design Engineering of Pioneer Semiconductor Corporation, now called Pericom, a
manufacturer of semiconductors. From 1980 to 1990, he served as design manager
of Xicor Inc., a nonvolatile semiconductor company. From 1977 to 1980, he served
as a senior design engineer for Intel Corporation. From 1969 to 1976, he was a
senior researcher at Toshiba's R&D Center in Japan. Mr. Nojima holds a B.S. and
an M.S. in Electrical Engineering from Osaka University in Japan.
Paul Lui joined us as Vice President and General Manager of the Linvex
Product Line in June 1999 until he was named Vice President, Special Product
Group. From 1994 to 1999, he was the president and founder of Linvex Technology
Corporation. From 1987 to 1994, he was the president and chief executive officer
of Macronix, Inc.. From 1981 to 1985, he served as group general manager at VLSI
Technology, Inc. where he was responsible for transferring that company's
technology to Korea. In addition, Mr. Lui has held senior engineering positions
at the Synertek Division of Honeywell and McDonnell Douglas. Mr. Lui holds an
M.S.E.E. degree from University of California, Berkeley and a B.S. degree in
Electrical Engineering and Mathematics from California Polytechnic State
University, San Luis Obispo.
Jeffrey L. Garon joined us as Chief Financial Officer and Vice
President, Finance and Administration and Corporate Secretary in March 1998.
Prior to that, Mr. Garon served as president and senior operating officer of The
Garon Financial Group, Inc., a venture capital and venture consulting firm
specializing in start-ups, turnarounds and restarts, from 1994 to 1998. From
1993 to 1994, he served as a vice president and chief financial officer of
Monster Cable Products, Inc., a leading provider of audio cables and supplies to
consumers and the consumer electronic retail channel. Prior to this, Mr. Garon
held senior financial positions with Visual Edge Technology, Inc., a provider of
large format digital imaging systems, Oracle Corporation, Ashton-Tate
Corporation and Teledyne Microelectronics. Mr. Garon holds a B.S. in Business
Administration Finance from California State University, Northridge and a M.B.A.
from Loyola Marymount University.
Tsuyoshi Taira has been a member of our board of directors since July
1993. Mr. Taira served as a member of the board of directors of Atmel
Corporation from 1987 to 1992. Mr. Taira served as president of Sanyo
Semiconductor Corporation from 1986 to 1993. Mr. Taira was chairman of the Sanyo
Semiconductor Corporation from 1993 to 1996. Mr. Taira left the Sanyo
Semiconductor Corporation in August, 1996. Mr. Taira currently owns and runs a
marketing and management consulting company, Tazan International, Inc. Mr. Taira
holds a B.S. from Tokyo Metropolitan University.
Yasushi Chikagami has been a member of our board of directors since
September 1995. Mr. Chikagami has been chairman of Arise, Inc since 2000. Mr.
Chikagami has also served as director of GVC Corporation and Trident
Microsystems, Inc. since 1993. Mr. Chikagami holds a B.S. in Agricultural
Engineering from Taiwan University and a M.S. in engineering from University of
Tokyo.
Ronald Chwang, Ph.D., is the Chairman and President of Acer Technology
Ventures, America. Dr. Chwang currently serves actively on the board of a number
of ATV's portfolio companies such as Reflectivity, Symmetry Communications
Systems, iRobot, OctaSoft, etc. He also serves on the board of Acer Laboratories
Inc. and Ambit Microsystems Corp. in Taiwan. From 1992 to 1997, Dr. Chwang was
president and chief executive officer of Acer America Corporation. Dr. Chwang
has been with Acer since 1986, serving in various executive positions leading
business units engaged in ASIC products, computer
12
peripherals, and Acer-Altos server system. Before joining Acer, Dr. Chwang
worked for several years in development and management positions at Intel in
Oregon and Bell Northern Research in Ottawa, Canada. Dr. Chwang holds a B.S. in
Electrical Engineering from McGill University and a Ph.D. in Electrical
Engineering from the University of Southern California.
Item 2. Properties
As of January 31, 2001, we occupy eight leased facilities totaling
approximately 188,000 square feet in Sunnyvale, California in which our
executive offices, manufacturing engineering, research and development and
testing facilities are located. Two leases were obtained upon the acquisition of
Linvex and Agate. Those leases expire in February 2001 and March 2002 and are
each less than 2,000 square feet. The leases on five other facilities expire in
2005 and the lease on the last facility expires in 2010. We believe these
facilities are adequate to meet our needs for at least the next 12 months.
Item 3. Legal Proceedings
Atmel Corporation
On January 3, 1996, Atmel Corporation sued us in the U.S. District Court for the
Northern District of California. Atmel's complaint alleged that we willfully
infringe five U.S. patents owned by or exclusively licensed to Atmel. Atmel
later amended its complaint to allege infringement of a sixth patent. Regarding
each of these six patents, Atmel sought a judgment that we infringe the patent,
an injunction prohibiting future infringement, and treble damages, as well as
attorney's fees and expenses.
On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals. Thus, four patents
remain at issue in Atmel's District Court case against us.
On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation. Pursuant to
indemnification agreements with these suppliers, we were obligated to indemnify
both to the extent provided in those agreements. As more fully described below,
the settlement with Winbond terminated our indemnity obligations to that
company.
As to one of these four patents, Atmel's claims were withdrawn because of the
summary judgment granted by the District Court, as described above. The
administrative law judge, or ALJ, who makes recommended determinations to the
ITC, ruled that we did not infringe the remaining three patents. As to one of
these patents, U.S. Patent No. 4,451,903 ("the `903 patent," also known as
"Silicon Signature"), the ALJ ruled on May 17, 2000 that it is invalid and
unenforceable because the patent did not name the proper inventors and because
Atmel intentionally misled the U.S. Patent Office. On October 16, 2000, the ITC
overturned the ALJ's recommendation on the `903 patent and ruled that we could
not import into the United States certain products that use this circuit. We
appealed the ITC ruling and in January 2001 the Federal Circuit Court issued an
order upholding the ITC's decision, but has not yet issued a written opinion
setting forth the basis of that order. The ITC also ruled that we do not
infringe the two other patents at issue ("the `811 and `829" patents). Atmel has
appealed that determination. Atmel's appeal brief is due on March 30, 2001, and
our brief is due on or before May 9, 2001. There is currently no schedule for
oral argument or the final determination of this appeal.
Any final decisions in the ITC action will not be dispositive in the pending
lawsuit because Atmel and SST can still pursue their claims in the District
Court action. The District Court has scheduled a hearing for December 15, 2001,
to set a trial date. We intend to vigorously defend ourselves against these
actions.
13
Winbond Electronics
On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of our termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond.
From time to time, we are also involved in other legal actions arising in the
ordinary course of business. While we have accrued certain amounts for the
estimated legal costs associated with defending these matters, there can be no
assurance the Atmel complaint or other third party assertions will be resolved
without costly litigation, in a manner that is not adverse to our financial
position, results of operations or cash flows or without requiring royalty
payments in the future which may adversely impact gross margins. No estimate can
be made of the possible loss or possible range of loss associated with the
resolution of these contingencies.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter to a vote of
security holders.
14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Price Range of Common Stock
The principal U.S. market for our Common Stock is The Nasdaq Stock
Market's National Market. The only class of our securities that is traded is our
Common Stock. Our Common Stock has traded on The Nasdaq Stock Market's National
Market since November 21, 1995, under the symbol SSTI. The following table sets
forth the quarterly high and low closing sales prices of the Common Stock for
the period indicated as reported by The Nasdaq Stock Market. These prices do not
include retail mark-ups, mark-downs, or commissions. The closing sales price of
SST's Common Stock on December 29, 2000, the last trading day in 2000, was
$11.8125.
1999: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 31, 1999 $ 1.354 $ 0.802
Second Quarter: April 1 - June 30, 1999 2.500 1.208
Third Quarter: July 1 - September 30, 1999 5.958 2.365
Fourth Quarter: October 1 - December 31, 1999 15.375 4.708
2000: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 31, 2000 $ 27.458 $ 9.854
Second Quarter: April 1 - June 30, 2000 36.083 20.330
Third Quarter: July 1 - September 30, 2000 34.063 18.604
Fourth Quarter: October 1 - December 31, 2000 27.375 10.125
2001: High Close Low Close
- ----- ---------- ---------
First Quarter: January 1 - March 12, 2001 $ 19.000 $ 9.313
Approximate Number of Equity Security Holders
As of December 31, 2000, there were approximately 79,000 record holders
of our Common Stock.
Dividends
We have never paid a cash dividend on our Common Stock and we intend to
continue to retain earnings, if any, to finance future growth. Accordingly, we
do not anticipate the payment of cash dividends to holders of Common Stock in
the foreseeable future. In addition, our line of credit does not permit the
payment of dividends.
15
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the notes thereto
included elsewhere in this report. The statements of operations data for the
years ended December 31, 1998, 1999 and 2000 and the balance sheet data at
December 31, 1999 and 2000 are derived from, and should be read in conjunction
with, the audited consolidated financial statements and notes thereto included
elsewhere in this report. The statements of operations data for the year ended
December 31, 1996 and 1997 and the balance sheet data at December 31, 1996, 1997
and 1998 are derived from audited financial statements not included in this
report. The results of operations are not necessarily indicative of the results
to be expected for future periods.
Year Ended December 31
--------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ------------
(in thousands, except per share data)
Consolidated Statements of Operations Data:
Net revenues:
Product revenues $90,638 $73,796 $66,875 $118,242 $475,316
License revenues 2,652 1,526 2,536 6,552 14,945
----------- ----------- ----------- ----------- ------------
Total net revenues 93,290 75,322 69,411 124,794 490,261
Cost of revenues 59,494 62,747 62,703 94,652 264,139
----------- ----------- ----------- ----------- ------------
Gross profit 33,796 12,575 6,708 30,142 226,122
----------- ----------- ----------- ----------- ------------
Operating expenses:
Research and development 6,948 8,744 14,527 18,199 41,535
Sales and marketing 5,292 6,587 7,290 10,576 27,968
General and administrative 3,370 9,479 4,592 3,800 14,966
In-process research and development - - - 2,011 3,911
----------- ----------- ----------- ----------- ------------
Total operating expenses 15,610 24,810 26,409 34,586 88,380
----------- ----------- ----------- ----------- ------------
Income (loss) from operations 18,186 (12,235) (19,701) (4,444) 137,742
Interest and other income, net 1,763 2,146 1,573 730 10,510
Interest expense - - (31) (214) (691)
----------- ----------- ----------- ----------- ------------
Income (loss) before provision for (benefit from)
income taxes 19,949 (10,089) (18,159) (3,928) 147,561
Provision for (benefit from) income taxes 7,598 (3,165) (571) 88 41,813
----------- ----------- ----------- ----------- ------------
Net income (loss) $12,351 ($6,924) ($17,588) ($4,016) $105,748
=========== =========== =========== =========== ============
Net income (loss) per share - basic $0.18 ($0.10) ($0.26) ($0.06) $1.23
=========== =========== =========== =========== ============
Net income (loss) per share - diluted $0.16 ($0.10) ($0.26) ($0.06) $1.13
=========== =========== =========== =========== ============
Consolidated Balance Sheet Data:
Total assets $ 80,914 $ 82,539 $ 56,138 $88,806 $ 512,590
=========== =========== =========== =========== ============
Long-term obligations $ 71 $ 66 $ 663 $ 446 $ 279
=========== =========== =========== =========== ============
Shareholders' equity $ 64,788 $ 55,889 $ 38,030 $41,015 $ 416,635
=========== =========== =========== =========== ============
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those discussed. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below under the heading
"Business Risks", as well as those discussed elsewhere in this report.
Overview
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communication and Internet computing
markets.
The semiconductor industry has historically been cyclical, characterized by
wide fluctuations in product supply and demand. From time to time, the industry
has also experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1996, 1997 and 1998. These
downturns have been characterized by weakening product demand, production
over-capacity and accelerated decline of selling prices, and in some cases have
lasted for more than a year. We recently began to experience a sharp downturn in
several of our markets late in the fourth quarter of 2000, as our customers
reacted to weakening demand for their products. To date, market conditions have
not improved during early 2001 and our customers have continued to return
product, cancel backlog and/or push out shipments. Our business could be harmed
by industry-wide fluctuations in the future.
We derived 77.6% of our product revenues for 2000 and 80.8% of our product
revenues during 1999 from product shipments to Asia. Additionally, all of our
major wafer suppliers and packaging and testing subcontractors are located in
Asia. During 1998 and 1997, several Asian countries where we do business,
including Japan, Taiwan and Korea, experienced severe currency fluctuation and
economic deflation, which negatively impacted our revenues and, therefore, our
ability to collect payments from these customers. In September 1999, Taiwan
experienced a major earthquake. The resulting disruption to the manufacturing
operations in the wafer foundries and assembly and testing subcontractors that
we use in Taiwan harmed our revenues and operating results during the third and
fourth quarters of 1999.
Our product sales are made primarily using short-term cancelable purchase
orders. The quantities actually purchased by the customer, as well as shipment
schedules, are frequently revised to reflect changes in the customer's needs and
in our supply of product. Accordingly, our backlog of open purchase orders at
any given time is not a meaningful indicator of future sales. Changes in the
amount of our backlog do not necessarily reflect a corresponding change in the
level of actual or potential sales.
Sales to customers and foreign stocking representatives are recognized upon
shipment, net of an allowance for estimated returns. Sales to distributors are
made primarily under arrangements allowing price protection and the right of
stock rotation on merchandise unsold to customers. Because of the uncertainty
associated with pricing concessions and future returns, we defer recognition of
such revenues, related costs of revenues and related gross margin until we are
notified by the distributor that the merchandise is sold by the distributor.
Most of our technology licenses provide for the payment of up-front license
fees and continuing royalties based on product sales. For license and other
arrangements for technology that we are continuing to enhance and refine and
under which we are obligated to provide unspecified enhancements, revenue is
recognized over the lesser of the estimated period we have historically enhanced
and developed refinements to the technology, generally three years, the upgrade
period, or the remaining portion of the upgrade period from the date of
delivery, provided all specified technology and documentation has been
delivered, the fee is fixed or determinable and collection of the fee is
probable. From time to time, we reexamine the estimated upgrade period relating
to licensed technology to determine if a change in the estimated update period
is needed. Revenues from license or other technology arrangements where we are
not continuing to enhance and refine the technology or are not obligated to
provide unspecified enhancements is recognized upon delivery, if the fee is
fixed or determinable and collection of the fee is probable.
17
We recognize royalties received under these arrangements during the upgrade
period as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. We recognize the remaining portion of
the royalties ratably over the remaining portion of the upgrade period. We
recognize royalties received after the upgrade period has elapsed when reported
to us, which generally coincides with the receipt of payment.
Results of Operations: Years Ended December 31, 2000, 1999, and 1998
Net Revenues
Net revenues were $490.3 million in 2000 compared to $124.8 million in 1999
and $69.4 million in 1998. The increase from both 1999 to 2000 and from 1998 to
1999 was due to increased shipment volume of new and existing products and due
to our ability to raise prices slightly in the second half of 1999 and 2000.
Average selling prices fluctuate due to a number of factors including the
overall supply and demand for our products in the marketplace, maturing product
cycles and declines in general economic conditions. We experienced a sharp
downturn in several of our markets late in the fourth quarter of 2000, as our
customers reacted to weakening demand for their products. To date, market
conditions have not improved during early 2001 and customers have continued to
return product, cancel backlog, and/or push out shipments.
Product Revenues. Product revenues were $475.3 million in 2000, $118.2
million in 1999 and $66.9 million in 1998. The increase from both 1999 to 2000
and from 1998 to 1999 was primarily due to shipments of new products introduced
in the second half of 1998 and during 1999 and 2000. Shipping volumes fluctuate
due to overall industry supply and demand. Product revenues decreased slightly
on a quarterly basis during the fourth quarter of 2000 due to lower shipping
levels and increases in sales return reserves during the fourth quarter. Our
allowance for sales returns increased $8.2 million due primarily to anticipated
product returns related to changing market conditions at the end of 2000.
License Revenues. Revenues from license fees and royalties were $14.9 million
in 2000, $6.6 million in 1999 and $2.5 million in 1998. The increase from 1999
to 2000 was primarily due to $10.4 million in license fee received as part of a
legal settlement. We anticipated another $5.0 million to be paid under this
legal settlement in each quarter of 2001. The increase from 1998 to 1999 was
primarily due to recognition of up-front fees paid by licensees and an increase
in the number of licensees from 1998. We anticipate that license revenues will
fluctuate significantly in the future.
Gross Profit
Gross profit was $226.1 million, or 46.1% of net revenues, in 2000, $30.1
million, or 24.2% of net revenues, in 1999, and $6.7 million, or 9.7% of net
revenues, in 1998. Gross profit increased across all periods due to increased
shipments of existing cost-reduced products, increased shipments of new, higher
margin products, and increased average selling prices on both older and newer
products. We also wrote down $4.3 million of inventory related to products that
we determined to be excess or obsolete during 2000.
Operating Expenses
Our operating expenses consist of research and development, sales and
marketing, and general and administrative expenses. Operating expenses were
$88.4 million, or 18.0% of net revenues, in 2000, as compared to $34.6 million
or 27.7% of net revenues, in 1999, and $26.4 million, or 38.0% of net revenues,
in 1998. The increase in absolute dollars from 1999 to 2000 was primarily due to
increased profit sharing with employees, increased commissions, and increased
salaries and benefits due to hiring additional personnel. The increase in
absolute dollars from 1998 to 1999 was primarily due to increased commissions
and increased salaries and benefits due to hiring additional personnel. We
anticipate that we will continue to devote substantial resources to research and
development, sales and marketing and to general and administrative, and that
these expenses will continue to increase in absolute dollar amounts.
18
Research and development. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs. These costs consist
primarily of employee salaries, benefits and the cost of materials such as
wafers and masks. Research and development expenses were $41.5 million, or 8.5%
of net revenues, during 2000, as compared to $18.2 million, or 14.6% of net
revenues, during 1999 and $14.5 million, or 20.9% of net revenues during 1998.
Research and development expenses increased 128.2% from 1999 primarily due to an
$8.5 million expense for profit sharing and expenses related to increased
engineering headcount, materials costs and occupancy costs. Research and
development expenses increased 25.3% from 1998 due to increased personnel costs,
consisting of salaries, payroll taxes, and benefits, increased wafer, mask and
tooling charges for new product development, and increased occupancy costs. We
expect research and development expenses to continue to increase in absolute
dollars.
Sales and marketing. Sales and marketing expenses consist primarily of
commissions to stocking representatives, personnel costs, and occupancy costs,
as well as travel and entertainment and promotional expenses. Sales and
marketing expenses were $28.0 million, or 5.7% of net revenues, in 2000 as
compared to $10.6 million, or 8.5% of net revenues, in 1999 and $7.3 million, or
10.5% of net revenues, during 1998. Sales and marketing expenses in 2000
increased 164.4% from 1999 and increased 45.1% in 1999 from 1998 due to
increased commissions owed on higher product revenues, increased personnel
costs, and increased building occupancy costs due to the lease of additional
space. We expect sales and marketing expense to increase in absolute dollars as
we continue to expand our sales and marketing efforts. In addition, fluctuations
in revenues will cause fluctuations in sales and marketing expense as it impacts
our commissions expense.
General and administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
professional services and legal fees and allowances for doubtful accounts.
General and administrative expenses were $15.0 million, or 3.1% of net revenues,
in 2000 as compared to $3.8 million, or 3.0% of net revenues, in 1999 and $4.6
million, or 6.6% of net revenues, during 1998. Expenses increased 293.8% from
1999 to 2000 due to increased legal, personnel, occupancy expenses and
depreciation expense associated with our new Oracle ERP system, which we
implemented in January 2000. General and administrative expenses decreased from
$4.6 million to $3.8 million from 1998 to 1999 due to the reversal of certain
legal accruals associated with the settlement of our lawsuit with Intel in 1999.
Our allowance for bad debt increased $477,000 due to the increase of our
accounts receivable from 1999 to 2000. We anticipate that general and
administrative expenses will continue to increase in absolute dollar amount as
we scale our facilities, infrastructure, and head count to support our overall
expected growth. We may also incur additional expenses in connection with the
Atmel litigation. For further information on this litigation see "Legal
Proceedings."
In-process Research and Development Charge. A charge of $3.9 million, or 0.8%
of net revenues, in 2000, relates to the expense for in-process research and
development incurred during the acquisition of Agate Semiconductor Inc. Refer
also to Note 7 of the Notes to the Consolidated Financial Statements. The fair
value of Agate's patents, workforce, and the technology currently under
development was determined by an independent appraiser using the income approach
for the patents and technology and the cost approach for the workforce. The
income approach discounts expected future cash flows to present value. The
discount rates used in the present value calculations were derived from a
weighted average cost of capital analysis, adjusted upward by a premium of 20%
to reflect additional risks inherent in the development life cycle. We believe
that the pricing model related to this acquisition is consistent within the
high-technology industry. We do not expect to achieve a material amount of the
expense reductions or synergies as a result of integrating the acquired
in-process technology. Therefore the valuation assumptions do not include
anticipated cost savings. In-process research and development valued at $3.9
million consisted of a single project to develop a high-density
multiple-bit-per-cell flash memory chip targeted for high-capacity, low cost
applications such as digital cameras, MP3 players, cellular telephones and
pagers. At the time of the acquisition the estimated cost to complete the
project was $2 to $3 million and the chip was approximately 50% complete. The
risk adjusted discount rate relating to in-process technology determined by the
independent appraiser to be 40.5%.
19
We expect that the multiple-bit-per-cell chip will be completed and begin to
generate cash flows within 12 to 18 months from the date of the acquisition.
However, development of the multiple-bit-per-cell remains a significant risk due
to the remaining effort to achieve technical viability, rapidly changing
customer markets, uncertain standards for new products and significant
competitive threats from numerous companies. The nature of the efforts to
develop the multiple-bit-per-cell chip into a commercially viable product
consists principally of planning, designing and testing activities necessary to
determine that the multiple-bit-per-cell chip can meet market expectations,
including functionality and technical requirements. Failure to bring the
multiple-bit-per-cell chip to market in a timely manner could result in a lost
opportunity to capitalize on emerging markets. Failure to achieve the expected
levels of revenues and net income from the multiple-bit-per-cell chip will
negatively impact the return on the investment expected at the time of the
acquisition and potentially result in impairment of other assets related to the
development activities.
A charge of $2.0 million, or 2% of net revenues, in 1999, relates to the
expense for in-process research and development incurred during the acquisition
of Linvex Technology Corporation. Refer also to the Notes to the Consolidated
Financial Statements. The fair value of Linvex' core technology, existing
products, as well as the technology currently under development was determined
by an independent appraiser using the income approach, which discounts expected
future cash flows to present value. The discount rates used in the present value
calculations were derived from a weighted average cost of capital analysis,
adjusted upward by a premium of 5% to reflect additional risks inherent in the
development life cycle. We expect that the pricing model related to this
acquisition will be considered standard within the high-technology industry. We
do not expect to achieve a material amount of expense reductions or synergies as
a result of integrating the acquired in-process technology. Therefore the
valuation assumptions do not include anticipated cost savings. In process
research and development valued at $2.0 million consisted of a single project to
combine flash and SRAM memory on a single chip (the ComboMemory chip). At the
time of the acquisition the estimated cost to complete the ComboMemory chip was
$1.1 million and the chip was approximately 42% complete. The risk adjusted
discount rate relating to in-process technology was 40%. During late 2000 and
early 2001, the ComboMemory chip was completed and began to generate cash
flows. However, if we fail to achieve the expected levels of revenues and net
income from the ComboMemory chip, this could negatively impact the return on
investment expected at the time of the acquisition and potentially result in
impairment of other assets related to the development activities.
Actions and comments regarding other companies from the Securities and
Exchange Commission have indicated that they are reviewing the current valuation
methodology of purchased in-process research and development relating to
acquisitions. The Commission is concerned that some companies are writing off
more of the value of an acquisition than is appropriate. We believe that we are
in compliance with all of the rules and related guidance as they currently
exist. However, the Commission may seek to reduce the amount of purchased
in-process research and development we have previously expensed. This would
result in the restatement of our previously filed financial statement and could
have a material negative impact on the financial results for the period
subsequent to the acquisition.
Interest Income. Interest income was approximately $9.9 million, or 2.0% of
net revenues, during 2000, as compared to $714,000, or 0.6% of net revenues,
during 1999, and $1.5 million, or 2.2% of net revenues, during 1998. Interest
income increased from 1999 to 2000 due to the receipt of cash proceeds from a
follow-on public offering and private placement, which closed on March 27, 2000,
and the underwriters exercise of an over-allotment option which closed April 13,
2000. Interest income decreased from 1998 to 1999 due to a decrease in cash
during that period.
Interest Expense. Interest expense was approximately $691,000 during 2000
as compared to $214,000 during 1999 and $31,000 during 1998. Interest expense
relates to borrowing prior to the completion of a follow-on public offering and
to fee activity under our line of credit. Interest expense increased each year
due to increased borrowing under our line of credit. Interest expense charges
will continue in order to maintain the line of credit facility.
20
Other income, net. Other income of $630,000 in 2000 consists primarily of the
receipt of a dividend of approximately $569,000 from an investee company during
the fourth quarter of 2000.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes was approximately $41.8 million
in 2000, approximately $88,000 in 1999 and ($571,000) in 1998. During 1998, we
created a valuation allowance because the cumulative net operating losses
incurred exceeded the amount of tax carry back available. During 2000 we
reversed the entire allowance. This reversal was due to our increased earnings
and was based on management's assessment that it is more likely than not that
all the net deferred tax assets will be realized through future taxable
earnings. See Note 8 of the Notes to the Consolidated Financial Statements of
this Annual Report on Form 10-K.
Segment Reporting
Our business has two reportable segments: flash products and technology
licensing. Flash products comprise our standard memory products, our application
specific memory products, flash-embedded controllers, mass storage products and
special products. Technology licensing comprises design service fees, technical
consultation fees, license fees and royalties earned through technology
agreements that we have with wafer foundries and manufacturers for non-competing
applications.
The table below presents information about reported segments for the three years
ended December 31:
2000 (in thousands):
-----------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 475,316 $ 14,945 $ 490,261
Gross profits $ 211,177 $ 14,945 $ 226,122
1999 (in thousands):
------------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 118,242 $ 6,552 $ 124,794
Gross profits $ 23,590 $ 6,552 $ 30,142
1998 (in thousands):
---------------------------------------------
Flash Technology
Products Licensing Total
---------- ---------- ----------
Revenues $ 66,875 $ 2,536 $ 69,411
Gross profits $ 4,172 $ 2,536 $ 6,708
21
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133," which deferred the effective date until the first
fiscal year beginning after June 15, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. We will adopt SFAS No. 133, as amended, in our quarter ending
March 31, 2001. The adoption of SFAS No. 133 will not have a material impact on
our financial statements.
Liquidity and Capital Resources
Operating activities. Cash provided by operations was $43.5 million in 2000
and relates primarily to net income of $105.7 million offset by accounts
receivable increase of $81.6 million and an increase in accounts receivable from
related parties of $14.4 million, all due to increased sales in 2000. Increases
in trade accounts payable of $20.0 million, trade payables to related parties of
$7.3 million, and accrued expenses of $28.5 million and deferred revenue of
$11.1 million were offset by increases in inventory of $47.8 million and
increases in other current and noncurrent assets of $11.6 million. Cash used in
operations was $35.8 million in 1999 and relates primarily to the increase in
accounts receivable and accounts receivable from related parties of $26.4
million and the increase in inventories of $24.7 million due to the
production ramp, offset in part by an $8.4 million increase in trade accounts
payable.
Investing activities. Cash used in investing activities of $173.1 million
during 2000 consisted primarily of investments of cash in available-for-sale
marketable securities. We also made strategic equity investments in privately
held companies which are either subcontractors to our production process or
customers; we also acquired equipment, invested in enterprise resource planning
software, and made leasehold improvements. Cash used in investing activities
during 1999 consisted primarily of $7.9 million to acquire test equipment,
furniture and fixtures. Planned capital spending for 2001 is currently
approximately $27.0 million to be used primarily for test equipment and design
engineering tools for research and development, information systems
infrastructure, and leasehold improvements.
On March 6, 2001, we invested $50.0 million in Shanghai Grace Semiconductor
Manufacturing Corporation (GSMC). GMSC is a foreign-funded wafer foundry project
and will be located in Shanghai, P.R.C.
Financing activities. Our financing activities provided cash of approximately
$237.5 million during 2000. The cash provided was primarily from the issuance of
common stock for $257.5 million and primarily relates to net proceeds from a
follow-on public offering in which we issued and sold 12,075,000 shares of
common stock, a private placement in which we issued and sold 504,000 shares of
common stock, and $3.8 million from common stock issued under the employee stock
purchase plan and the exercise of employee stock options, offset by the
repayment of our entire line of credit at the end of March, 2000. Cash provided
by financing activities during 1999 consisted primarily of borrowings under the
line of credit of $42.2 million offset by payments of $22.9 million under that
same line.
22
Principal sources of liquidity at December 31, 2000 consisted of $249.0
million of cash, cash equivalents, and short-term marketable securities and the
line of credit. As of December 31, 2000 we had no borrowing on our line of
credit as this credit facility was paid off during March, 2000. However we
continue to have access to this facility should we need it. As of December 31,
2000, our line of credit was for $25 million. This agreement expires in
September 2002. Borrowing is limited to 80.0% of eligible world-wide accounts
receivable and is also reduced by any letters of credit issued under a $25
million subagreement to this line. Therefore, as of December 31, 2000, our
actual credit available under this line was approximately $4.0 million. The line
bears interest at a rate of the bank's reference rate (9.5% at December 31,
2000) plus 0.5%. There is a minimum interest rate of 6.0%. We are required to
maintain specified levels of tangible net worth. Under the agreement we are not
permitted to pay a dividend. We must pay an unused line fee at the annual rate
of one quarter of one percent on the unused portion. As of December 31, 2000, we
were in compliance with the covenants of this agreement. Subsequent to December
31, 2000 the line of credit was increased to $35 million.
Purchase Commitments. We have committed to pay $50.0 million in 2001, subject
to certain business conditions, to secure increased wafer capacity in 2001 and
2002.
We believe that our cash balances, together with funds expected to be
generated from operations and the line of credit availability, will be
sufficient to meet our projected working capital and other cash requirements
through at least the next twelve months. However, there can be no assurance that
future events will not require us to seek additional borrowings or capital and,
if so required, that such borrowing or capital will be available on acceptable
terms.
23
Business Risks
Risks Related to Our Business
Our operating results fluctuate significantly, and an unanticipated decline in
revenues may disappoint securities analysts or investors and result in a decline
in our stock price.
Our recent growth may not be sustainable, and you should not use our past
financial performance to predict future operating results. Although we were
profitable in 2000, we incurred net losses in fiscal 1997, 1998 and 1999. Our
recent quarterly and annual operating results have fluctuated, and will continue
to fluctuate, due to the following factors, all of which are difficult to
forecast and many of which are out of our control:
o the availability, timely delivery and cost of wafers from our suppliers;
o competitive pricing pressures and related changes in selling prices;
o fluctuations in manufacturing yields and significant yield losses;
o new product announcements and introductions of competing products by us
or our competitors;
o product obsolescence;
o lower of cost or market inventory adjustments;
o changes in demand for, or in the mix of, our products;
o the gain or loss of significant customers;
o market acceptance of products utilizing our SuperFlash(R) technology;
o changes in the channels through which our products are distributed and
the timeliness of receipt of distributor resale information;
o exchange rate fluctuations;
o general economic, political and environmental-related conditions, such
as natural disasters;
o difficulties in forecasting, planning and management of inventory
levels;
o unanticipated research and development expenses associated with new
product introductions; and
o the timing of significant orders and of license and royalty revenue.
A downturn in the market for products such as personal computers and cellular
telephones that incorporate our products can also harm our operating results.
Our operating expenses are relatively fixed, and we order materials in advance
of anticipated customer demand. Therefore, we have limited ability to reduce
expenses quickly in response to any revenue shortfalls.
Our operating expenses are relatively fixed, and we therefore have limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our operating results will be harmed if our revenues do not meet
our revenue projections. We may experience revenue shortfalls for the following
reasons:
o sudden drops in consumer demand which causes customers to cancel
backlog, push out shipment schedules, or reduce new orders, possibly
due to a slowing economy or inventory corrections among our customers;
o significant declines in selling prices that occur because of
competitive price pressure during an over-supply market environment;
o sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our
ability to meet our sales obligations; and
o the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. From time to time, in response to anticipated long lead
times to obtain inventory and materials from our outside suppliers and
foundries, we may order materials in advance of anticipated customer demand.
This advance ordering may result in excess inventory levels or unanticipated
inventory write-downs if expected orders fail to materialize.
24
Cancellations or rescheduling of backlog may result in lower future revenue and
harm our business.
Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business. We experienced a sharp downturn in several of our
markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products. To date, market conditions have not
improved during early 2001 and our customers have continued to return product,
cancel backlog and/or push out shipments. Our business could be harmed by
industry-wide fluctuations in the future.
We depend on a limited number of foreign foundries to manufacture our products,
and these foundries may not be able to satisfy our manufacturing requirements,
which could cause our revenues to decline.
We outsource all of our manufacturing with the exception of limited testing
activities. We currently buy all of our wafers and sorted die from a limited
number of suppliers. Substantially all of our products are manufactured by four
foundries, Taiwan Semiconductor Manufacturing Co., Ltd., in Taiwan, Sanyo
Electric Co., Ltd., in Japan, Seiko-Epson Corp. in Japan, and Samsung
Electronics Ltd. in Korea. We anticipate that these foundries, together with
National Semiconductor Corporation in the United States and Vanguard
International Semiconductor Corporation in Taiwan, will manufacture the majority
of our products in 2001. On March 6, 2001, we invested $50.0 million in Shanghai
Grace Semiconductor Manufacturing Corporation (GSMC). GMSC is a foreign-funded
wafer foundry project which will be located in Shanghai, P.R.C. If these
suppliers fail to satisfy our requirements on a timely basis and at competitive
prices we could suffer manufacturing delays, a possible loss of revenues or
higher than anticipated costs of revenues, any of which could harm our operating
results.
Our revenues may be impacted by our ability to obtain adequate wafer supplies
from our foundries. The foundries with which we currently have arrangements,
together with any additional foundry at which capacity might be obtained, may
not be willing or able to satisfy all of our manufacturing requirements on a
timely basis at favorable prices. In addition, we have encountered delays in
qualifying new products and in ramping new product production and could
experience these delays in the future. We are also subject to the risks of
service disruptions, raw material shortages and price increases by the
foundries. Such disruptions, shortages and price increases could harm our
operating results.
If we are unable to increase our manufacturing capacity, our revenues may
decline.
In order to grow, we need to increase our present manufacturing capacity. Events
that we have not foreseen could arise which would limit our capacity. We are
continually engaged in attempting to secure additional manufacturing capacity to
support our long-term growth. In the longer term we may determine that it is
necessary to invest substantial capital in order to secure appropriate
production capacity commitments. If we cannot secure additional manufacturing
capacity on acceptable terms, our ability to grow will be impaired and our
operating results will be harmed.
Our cost of revenues may increase if we are required to purchase manufacturing
capacity in the future.
To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with wafer fabrication companies. These transactions
could involve a commitment of substantial amounts of our capital and technology
licenses in return for production capacity. We may be required to seek
additional debt or equity financing if we need substantial capital in order to
secure this capacity and we cannot assure you that we will be able to obtain
such financing.
25
If our foundries fail to achieve acceptable wafer manufacturing yields, we will
experience higher costs of revenues and reduced product availability.
The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from marginal design or manufacturing process drift. Yield
problems may not be identified until the wafers are well into the production
process, which often makes them difficult, time consuming and costly to correct.
Furthermore we rely on independent foreign foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems. If our foundries fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability, which would harm our operating results.
If our foundries discontinue the manufacturing processes needed to meet our
demands, or fail to upgrade the technologies needed to manufacture our products,
we may face production delays and lower revenues.
Our wafer and product requirements typically represent a small portion of the
total production of the foundries that manufacture our products. As a result, we
are subject to the risk that a foundry will cease production on an older or
lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our foundries will continue to devote
resources to advance the process technologies on which the manufacturing of our
products is based. Each of these events could increase our costs and harm our
ability to deliver our products on time.
Our dependence on third-party subcontractors to assemble and test our products
subjects us to a number of risks, including an inadequate supply of products and
higher costs of materials.
We depend on independent subcontractors to assemble and test our products. Our
reliance on these subcontractors involves the following significant risks:
o reduced control over delivery schedules and quality;
o the potential lack of adequate capacity during periods of strong demand;
o difficulties selecting and integrating new subcontractors;
o limited warranties on products supplied to us;
o potential increases in prices due to capacity shortages and other factors;
and
o potential misappropriation of our intellectual property.
These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage, which would harm our profitability and customer
relationships.
Because our flash memory products typically have lengthy sales cycles, we may
experience substantial delays between incurring expenses related to research and
development and the generation of revenues.
Due to the flash memory product cycle we usually require more than nine months
to realize volume shipments after we first contact a customer. We first work
with customers to achieve a design win, which may take three months or longer.
Our customers then complete the design, testing and evaluation process and begin
to ramp up production, a period which typically lasts an additional six months
or longer. As a result, a significant period of time may elapse between our
research and development efforts and our realization of revenue, if any, from
volume purchasing of our products by our customers.
We face intense competition from companies with significantly greater financial,
technical and marketing resources that could harm sales of our products.
We compete with major domestic and international semiconductor companies, many
of which have substantially greater financial, technical, marketing,
distribution, and other resources than we do. Many of our
26
competitors have their own facilities for the production of semiconductor memory
components and have recently added significant capacity for such production.
Our memory products, which presently account for substantially all of our
revenues, compete principally against products offered by Intel, Advanced Micro
Devices, Atmel, STMicroelectronics, Sanyo, Winbond Electronics and Macronix. If
we are successful in developing our high density products, these products will
compete principally with products offered by Intel, Advanced Micro Devices,
Fujitsu, Hitachi, Sharp, Samsung Semiconductor, SanDisk and Toshiba, as well as
any new entrants to the market.
In addition, we may in the future experience direct competition from our foundry
partners. We have licensed to our foundry partners the right to fabricate
products based on our technology and circuit design, and to sell such products
worldwide, subject to our receipt of royalty payments.
Competition may also come from alternative technologies such as ferroelectric
random access memory, or FRAM, or other developing technologies.
Our markets are subject to rapid technological change and, therefore, our
success depends on our ability to develop and introduce new products.
The markets for our products are characterized by:
o rapidly changing technologies;
o evolving and competing industry standards;
o changing customer needs;
o frequent new product introductions and enhancements;
o increased integration with other functions; and
o rapid product obsolescence.
To develop new products for our target markets, we must develop, gain access to
and use leading technologies in a cost-effective and timely manner and continue
to expand our technical and design expertise. In addition, we must have our
products designed into our customers' future products and maintain close working
relationships with key customers in order to develop new products that meet
their changing needs.
In addition, products for communications applications are based on continually
evolving industry standards. Our ability to compete will depend on our ability
to identify and ensure compliance with these industry standards. As a result, we
could be required to invest significant time and effort and incur significant
expense to redesign our products and ensure compliance with relevant standards.
We believe that products for these applications will encounter intense
competition and be highly price sensitive. While we are currently developing and
introducing new products for these applications, we cannot assure you that these
products will reach the market on time, will satisfactorily address customer
needs, will be sold in high volume, or will be sold at profitable margins.
We cannot assure you that we will be able to identify new product opportunities
successfully, develop and bring to market new products, achieve design wins or
respond effectively to new technological changes or product announcements by our
competitors. In addition, we may not be successful in developing or using new
technologies or in developing new products or product enhancements that achieve
market acceptance. Our pursuit of necessary technological advances may require
substantial time and expense. Failure in any of these areas could harm our
operating results.
Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, recruit and retain additional personnel.
We are highly dependent on Bing Yeh, our President and Chief Executive Officer,
as well as the other principal members of our management team and engineering
staff. There is intense competition for qualified personnel in the semiconductor
industry, in particular the highly skilled design, applications and test
engineers involved in the development of flash memory technology. Competition is
especially intense in Silicon Valley, where our corporate headquarters is
located. We may not be able to continue to attract and retain engineers or
27
other qualified personnel necessary for the development of our business or to
replace engineers or other qualified personnel who may leave our employ in the
future. Our anticipated growth is expected to place increased demands on our
resources and will likely require the addition of new management and engineering
personnel and the development of additional expertise by existing management
personnel. The failure to recruit and retain key design engineers or other
technical and management personnel could harm our business.
Our ability to compete successfully will depend, in part, on our ability to
protect our intellectual property rights.
We rely on a combination of patent, trade secrets, copyrights, mask work rights,
nondisclosure agreements and other contractual provisions and technical measures
to protect our intellectual property rights. Policing unauthorized use of our
products, however, is difficult, especially in foreign countries. Litigation may
continue to be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Litigation could result in substantial costs and diversion of
resources and could harm our business, operating results and financial condition
regardless of the outcome of the litigation. We own 32 patents in the United
States relating to our products and processes, and have filed for several more.
In addition, we hold several patents in Europe and Canada, and have filed
several foreign patent applications in Europe, Japan, Korea, Taiwan and Canada.
We cannot assure you that any pending patent application will be granted. Our
operating results could be harmed by the failure to protect our intellectual
property.
If we are accused of infringing the intellectual property rights of other
parties we may become subject to time-consuming and costly litigation. If we
lose, we could suffer a significant impact on our business and be forced to pay
damages.
Third parties may assert that our products infringe their proprietary rights, or
may assert claims for indemnification resulting from infringement claims against
us. Any such claims may cause us to delay or cancel shipment of our products or
pay damages which could harm our business, financial condition and results of
operations. In addition, irrespective of the validity or the successful
assertion of such claims, we could incur significant costs in defending against
such claims.
Over the past three years we were sued both by Atmel Corporation and Intel
Corporation regarding patent infringement issues and by Winbond Electronics
Corporation regarding our contractual relationship with them. Significant
management time and financial resources have been devoted to defending these
lawsuits. We settled with Intel in May 1999, with Winbond in October 2000, and
the Atmel litigation is ongoing.
In addition to the Atmel, Intel and Winbond actions, we receive from time to
time, letters or communications from other companies stating that such companies
have patent rights which involve our products. Since the design of all of our
products is based on SuperFlash technology, any legal finding that the use of
our SuperFlash technology infringes the patent of another company would have a
significantly negative effect on our entire product line and operating results.
Furthermore, if such a finding were made, there can be no assurance that we
could license the other company's technology on commercially reasonable terms or
that we could successfully operate without such technology. Moreover, if we are
found to infringe, we could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using, selling, or
importing into the United States any products that infringe the protected
technology. In addition, the management attention consumed by and legal cost
associated with any litigation could harm our operating results.
Public announcements may hurt our stock price. During the course of lawsuits
there may be public announcements of the results of hearings, motions, and other
interim proceedings or developments in the litigation. If securities analysts or
investors perceive these results to be negative, it could harm the market price
of our stock.
Our litigation may be expensive, may be protracted and confidential information
may be compromised. Whether or not we are successful in our lawsuit with Atmel,
we expect this litigation to consume substantial amounts of our financial and
managerial resources. At any time Atmel may file additional claims against us,
28
which could increase the risk, expense and duration of the litigation. Further,
because of the substantial amount of discovery required in connection with this
type of litigation, there is a risk that some of our confidential information
could be compromised by disclosure.
Our business may suffer due to risks associated with international sales and
operations.
During 1998, 1999 and 2000, our export product and licensing revenues accounted
for approximately 92.7%, 89.1% and 84.3% of our net revenues, respectively.
Our international business activities are subject to a number of risks, each of
which could impose unexpected costs on us that would harm our operating results.
These risks include:
o difficulties in complying with regulatory requirements and standards;
o tariffs and other trade barriers;
o costs and risks of localizing products for foreign countries;
o reliance on third parties to distribute our products;
o longer accounts receivable payment cycles;
o potentially adverse tax consequences;
o limits on repatriation of earnings; and
o burdens of complying with a wide variety of foreign laws.
We derived 80.8% and 77.6% of our product revenue from Asia during 1999 and
2000, respectively. Additionally, our major wafer suppliers and assembly and
packaging subcontractors are all located in Asia. Any kind of economic,
political or environmental instability in this region of the world can have a
severe negative impact on our operating results due to the large concentration
of our production and sales activities in this region. For example, during 1997
and 1998, several Asian countries where we do business, such as Japan, Taiwan
and Korea, experienced severe currency fluctuation and economic deflation, which
negatively impacted our total revenues and also negatively impacted our ability
to collect payments from these customers. During this period, the lack of
capital in the financial sectors of these countries made it difficult for our
customers to open letters of credit or other financial instruments that are
guaranteed by foreign banks. Finally, the economic situation in this period
exacerbated a decline in selling prices for our products as our competitors
reduced product prices to generate needed cash.
It should also be noted that we are greatly impacted by the political, economic
and military conditions in Taiwan. Taiwan and China are continuously engaged in
political disputes and both countries have continued to conduct military
exercises in or near the other's territorial waters and airspace. Such disputes
may continue and even escalate, resulting in an economic embargo, a disruption
in shipping or even military hostilities. Any of these events could delay
production or shipment of our products. Any kind of activity of this nature or
even rumors of such activity could harm our operations, revenues, operating
results, and stock price.
Because a small number of customer accounts are responsible for a substantial
portion of our revenues, our revenues could decline due to the loss of one of
these customer accounts.
In the past, more than half of our revenues have come from a small number of
customer accounts. For example, product sales to our top 10 customer accounts
represented approximately 62.8%, 53.6% and 43.0% of our product revenues for
1998, 1999 and 2000, respectively. During 2000, 7 of our top 10 accounts were
stocking representatives, two were domestic distributors and one was an OEM. In
1998, one customer account represented 15.2% of product sales. Another customer
account represented 10.7% and 12.4% of product sales in 1998 and 1999,
respectively. No single customer account represented 10.0% or more of product
revenues during 2000. If we were to lose any of these customer accounts or
experience any substantial reduction in orders from these customer accounts, our
revenues and operating results would suffer. In addition, the composition of our
major customer account base changes from year to year as the market demand for
our end customers' products change.
29
We do not typically enter into long-term contracts with our customers, and the
loss of a major customer could harm our business.
We do not typically enter into long-term contracts with our customers, and we
cannot be certain as to future order levels from our customers. When we do enter
into a long-term contract, the contract is generally terminable at the
convenience of the customer. An early termination by one of our major customers
would harm our financial results as it is unlikely that we would be able to
rapidly replace that revenue source.
If an earthquake or other natural disaster strikes our manufacturing facility or
those of our suppliers, we would be unable to manufacture our products for a
substantial amount of time and we would experience lost revenues.
Our corporate headquarters are located in California near major earthquake
faults. In addition, some of our suppliers are located near fault lines. In the
event of a major earthquake or other natural disaster near our headquarters, our
operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of our major suppliers, like the one that occurred in
Taiwan in September 1999, could disrupt the operations of those suppliers, which
could limit the supply of our products and harm our business.
Prolonged electrical power outages or shortages, or increased costs of energy
could harm our business.
Our design and process research and development facilities and our corporate
offices are located in California, which is currently susceptible to power
outages and shortages as well as increased eneregy costs. To limit this
exposure, we are in the process of securing back-up generators and power
supplies to our main California facilities. While the majority of our production
facilities are not located in California, more extensive power shortages in the
state could delay our design and process research and development as well as
increase our operating costs.
We depend on stocking representatives and distributors to generate a majority of
our revenues.
We rely on stocking representatives and distributors to establish and maintain
customer relationships and, at times, to sell our products and these accounts
could discontinue their relationship with us or discontinue selling our products
at any time. Two of our stocking representatives are responsible for
relationships with customers which account for substantially all of our product
sales in Taiwan, which were 28.3% and 25.5% of our net product revenues during
1999 and 2000. One stocking representative was responsible for relationships
with customers which accounted for substantially all of our sales in China,
including Hong Kong, during 1999 and 2000, which accounted for 24.3% and 19.1%
of our total product revenues during 1999 and 2000, respectively. The loss of
any of these stocking representatives, or any other significant stocking
representative or distributor could harm our operating results by impairing our
ability to sell our products to these customers.
Our growth continues to place a significant strain on our management systems and
resources and if we fail to manage our growth, our ability to market and sell
our products and develop new products may he harmed.
Our business is experiencing rapid growth which has strained our internal
systems and will require us to continuously develop sophisticated information
management systems in order to manage the business effectively. We are currently
implementing a supply-chain management system and a vendor electronic data
interface system. There is no guarantee that we will be able to implement these
new systems in a timely fashion, that in themselves they will be adequate to
address our expected growth, or that we will be able to foresee in a timely
manner other infrastructure needs before they arise. Our success depends on the
ability of our executive officers to effectively manage our growth. If we are
unable to manage our growth effectively, our results of operations will be
harmed. If we fail to successfully implement new management information systems,
our business may suffer severe inefficiencies that may harm the results of our
operations.
30
Risks Related to Our Industry
Our success is dependent on the growth and strength of the flash memory market.
All of our products, as well as all new products currently under design, are
stand-alone flash memory devices or devices embedded with flash memory. A memory
technology other than SuperFlash may be adopted as an industry standard. Our
competitors are generally in a better financial and marketing position than we
are from which to influence industry acceptance of a particular memory
technology. In particular, a primary source of competition may come from
alternative technologies such as FRAM devices if such technology is
commercialized for higher density applications. To the extent our competitors
are able to promote a technology other than SuperFlash as an industry standard,
our business will be seriously harmed.
The selling prices for our products are extremely volatile and have historically
declined during periods of over capacity or industry downturns. In addition, the
cyclical nature of the semiconductor industry could create fluctuations in our
operating results, as we experienced in 1997 and 1998.
The semiconductor industry has historically been cyclical, characterized by wide
fluctuations in product supply and demand. From time to time, the industry has
also experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1997 and 1998. These downturns
have been characterized by diminished product demand, production over-capacity
and accelerated decline of average selling prices, and in some cases have lasted
for more than a year. Our business could be harmed by industry-wide fluctuations
in the future. The flash memory products portion of the semiconductor industry,
from which we derive substantially all of our revenues, continued to suffer from
excess capacity in 1996, 1997 and 1998, which resulted in greater than normal
declines in our markets, which unfavorably impacted our revenues, gross margins
and profitability. While these conditions improved in 1999 and 2000,
deteriorating market conditions at the end of 2000 and early 2001 could result
in the eventual decline of our selling prices and, if such declines were to
resume, our growth and operating results would be harmed.
There is seasonality in our business and if we fail to continue to introduce new
products this seasonality may become more pronounced.
Sales of our products in the consumer electronics applications market are
subject to seasonality. As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the second
half of each year. In 1999 and the first half of 2000, this seasonality was
partially offset by the introduction of new products as we continued to
diversify our product offerings. If we fail to continue to introduce new
products, our business may suffer and the seasonality of a portion of our sales
may become more pronounced.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve could negatively
impact our operating results and financial condition. All of our sales are
denominated in U.S. dollars. An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore reduce the demand for our products. Such a decline in the demand could
reduce revenues and/or result in operating losses. In addition, a downturn in
the Japanese economy could impair the value of our investment in our Japanese
affiliate, Silicon Technology, Co.,